When an obscure cryptocurrency with a total market cap of approximately $14m skyrockets to over $400m, people take notice.
But, when that cryptocurrency forms the backbone of a social media entity rewarding people for creating content, sometimes with thousands or tens of thousands of dollars for single posts, excitement and skepticism ensues.
Launched in March and gaining prominence in July, Steemit, a self-described "blockchain-based social media platform", has seen this level of notoriety in just its first few months of operation. To date, it has polarized blockchain experts while winning scores of newcomers to the technology.
The brain-child of Daniel Larimer, founder of BitShares, and Ned Scott, a former financial analyst, Steemit aims to provide a place for individuals to create content, promote the content they believe is good and comment on stories — all while earning money.
But Steemit is more than just a website for earning spare change.
It’s an actual blockchain built on a piece of technology developed by Larimer called Graphene, which allows for the deployment of application-specific blockchains.
Scott, in interview with CoinDesk, explained that the team only had the idea for Steemit back in January and, because of the Graphene framework, they were able to quickly roll the project out.
The rest, like most things in the blockchain space, is a bit difficult to explain.
The pop
For the first few months, there wasn’t much talk about Steemit.
While there were early miners and people contributing content, the real big bang didn’t come until 4th July. When the dam opened, $1.3m worth of stored-up blockchain-based currency called "steem" was released to those that had been participating on the platform.
Scott explained that, while all of the blog posts, comments and upvotes that had occurred on the site pre-July 4th were all on the blockchain, the rewards users had been promised for their contributions had not been distributed. The underlying idea was that the team wanted to continue testing the platform, finding bugs and fixing them prior to a rush of new people signing up.
He cautioned that, no matter how diligent the development team is, there are going to be bugs and that they wanted to ensure that Steemit was safe and secure for everyone.
Nevertheless, 4th July was a day that they had all been looking forward to.
Scott said:
"What happened on 4th July, it was like a three-month long day that finally ended. Today, the rewards pool distributes in a continuous matter. On that first day, it was sort of this moment that had been building up."
And with that pop, users who had been watching their balances rise were instantly rewarded.
One currency, two smart contracts
Part of the confusion with Steemit lies in the different ways that the currency is presented to users.
At the root is the currency Steem, which is the typical transferrable, fungible, freely moveable token akin to bitcoin, ethereum or any other cryptocurrency. But that same Steem can be put into two different types of smart contracts depending on the particular utility an individual wants.
The first is called Steem Power, which provides utility and leverage. Steem Power is the backbone of an account's voting-potential. In other words, the more Steem Power an individual has, the stronger their vote is on Steemit.
Scott explained that the team wanted to provide a mechanism by which individuals could take a long-term interest in the project, while allowing others to continue with their speculation. In the white paper, Steem Power is compared to long-term capital commitments, similar to what a venture capitalist might do.
While users can invest their money instantly, there is an expectation that it will take time to see a return on that investment.
In the case of Steem Power, should a user want to convert back to the base currency of Steem, it will need to occur in 104 weekly conversions.
The second smart contract is called Steem Dollars. This is a debt-like instrument that promises to distribute $1 worth of Steem to the token holder at some point in the future.
Scott explained:
"[This is] the blockchain telling the holders of Steem Dollars that, at any point in the future, the blockchain will convert their Steem Dollars into a dollar’s worth of Steem after a seven day conversion process."
This seven-day conversion process is meant to minimize the ability to create arbitrage attacks by market timers. If the Steem Dollars were convertible to Steem immediately, a user could take advantage of a difference in price, convert their Steem Dollars into regular Steem and earn more than the $1 worth the smart contract intended for it.
Because it is a stable debt instrument, users who hold Steem Dollars miss out on any Steem price increases. If Steem is worth $1 and this conversion took place, the individual would receive 1 Steem for every Steem Dollar they owned. If Steem rose to $2, the individual would receive 0.5 Steem for every Steem Dollar they owned.
To compensate for the locked value, Steem Dollars accrue interest. At time of story, users that hold Steem Dollars will earn 10% a year in interest, paid out in Steem Dollars.
Rewards for writing and curating
There are two methods of earning Steem on Steemit.
The first is by writing a blog post. As that blog post accrues votes, the amount of Steem that will be distributed to the writer increase.
However, every vote on the site is not worth a flat amount of money. Instead, the amount earned is based on both the number of votes an individual receives and the amount of Steem Power a voter has.
For example, if one user had 1,000 Steem Power and another had 10,000 Steem Power, it's clear that the latter has a more powerful account than the former. The effect of each of those two people voting on a piece of content is not equal; specifically, the user with 10,000 Steem Power's vote is worth more.
This has resulted in the development of a sort of whale chasing culture, whereby writers hope to convince the large Steem Power holders to give them upvotes. A vote by Scott or Larimer has been seen to increase the value of a post by hundreds of dollars, resulting in a pile-on effect where others chase the post.
To incentivize this sort of voting, there is also the curation reward paid out in the form of Steem Power. If a post does well, you earn more Steem Power than if a post doesn’t do well, thus incentivizing you to only vote for content that you believe is high quality.
Further, not every vote from the same account is equal in value. Voting on multiple pieces of content reduces the strength of each of your votes depending on how much time passes between each vote. Scott explained voting power by comparing it to certain video games.
He said:
"It’s a lot like Diablo or something where you have mana. What happens is, if you're casting a lot of spells, your mana decreases and then it generates over time. The same is true of voting power. You have to put some thought into votes because you don’t want to waste your voting power."
There are two reward pool distributions.
The first is approximately 12 hours after the post has been submitted. The reward, denominated in US dollars, is released to the writer divided evenly between Steem Power and Steem Dollars. Voters receive the reward entirely in Steem Power. The second reward pool distribution occurs one month later.
Delegated proof-of-stake
A blockchain without security is not one anyone would have faith in.
Steemit gains its security from a delegated proof-of-stake algorithm, first developed for Larimer's BitShares project, which is a variation of proof-of-stake. A true proof-of-stake algorithm, such as peercoin, relies on those who hold the currency to verify transactions.
The more currency held by a wider variety of people, the more secure the network is.
In a delegated proof-of-stake system, the community votes for individuals, called witnesses, to be responsible for verifying transactions.
The easiest way to think about it is proof-of-stake is true democracy similar to ancient Athens. Delegated proof-of-stake is more of a democratic republic, such as the US. By that logic, witnesses are like Congressmen, elected by the community to be responsible for securing the network.
However, the analogy ends there, because witnesses can be kicked out of their job for not doing it, something the US Congress has been immune to for some time.
Scott said:
"It’s a paid position. We're not talking about four-year terms. We're talking about people with very specific jobs, which are to produce and verify blocks."
In total, there are 21 witnesses responsible for creating and signing blocks of transactions each time a block is made. The first 19 are voted for, as described above. Then there is a 20th witness, which is a random witness who might not have been in the top 19. The 21st witness is a miner doing typical proof-of-work.
In the Steemit white paper, the authors write:
"This process is designed to provide the best reliability while ensuring that everyone has the potential to participate in block production regardless of whether they are popular enough to get voted to the top."
New, but growing
Since catapulting in value to over $400m, Steem has cooled to an approximate market-cap of $157m, but this still makes it one of the six largest cryptocurrencies on the space.
While there are certainly naysayers, the reality is that Steemit continues to see more people signing up and participating.
However, it’s not simply Steemit the social media site, but also the blockchain that has experienced tremendous growth. Scott said that entrepreneurs and developers have already created 50 different tools, such as Catch a Whale (which tracks where whales have recently voted) and SteemMarket (which lets users buy, sell and rent goods with Steem).
Ned said:
"The people showing up to use this are going directly to the blockchain. We don't have the authority to tell them not to. In fact, we implore it. What we set out to do is build an ecosystem and that’s exactly what’s happening."